Prof Raymond Parsons from the North-West University (NWU) Business School explains the rationale behind the Monetary Policy Committee’s decision to leave interest rates unchanged.

“As widely expected the MPC again decided by a 3/2 vote to leave interest rates unchanged. The narrowly divided vote confirms there are arguments both ways,” says Prof Parsons.

“However, in present unusual economic circumstances the decision cannot not be made on narrow technical grounds, but rather by exercising broad judgement. It is therefore a pity, as the intensified pandemic continues to take a heavy toll of lives and livelihoods, that a majority of the MPC members did not see their way clear to give economic recovery in 2021 a little more interest rate support.”

He goes on to explain that it is generally acknowledged that the monetary policy cannot do the heavy lifting with regard to economic growth in South Africa, and that the main solution to the challenge of securing job-rich growth lies in economic reforms.

“Yet the South African Reserve Bank (SARB) acted promptly and commendably early last year to cut the repo rate by up to 300 basis points to assist the economy when Covid-19 first hit South Africa, which helped to cushion the pandemic’s economic impact. Borrowing costs must stay as low as possible for as long as circumstances permit,” says Prof Parsons.

“Furthermore, in its November 2020 statement the MPC saw future downside risks to growth. Hence it is surprising that the SARB now still expects growth to be 3,6% in 2021, which may be on the optimistic side.

“Recent high frequency economic data has not been positive. The combination of subdued inflation, a relatively stable rand and the weak growth outlook has thus created space for a further modest cut in borrowing costs for business and consumers.”

Prof Parsons concludes by saying: “The balance of risks on both the inflation and growth fronts have therefore recently shifted in ways which would have allowed for an additional cut in interest rates of, say, 25 basis points at little risk to the SARB’s anti-inflation mandate.

“The burden of proof for a central bank cannot be an absolute certainty. Even a small further positive move on borrowing costs at this stage would have sent an affirmative message to the economy. The MPC failed on this occasion to give the economy the injection of confidence it needs.”